States across the country have accumulated at least $900 billion in off-balance-sheet liabilities, potentially leaving future taxpayers with much heavier tax burdens than states currently are imposing or acknowleding, according to a new study from the Institute for Truth in Accounting (IFTA).
Government employee pensions and health benefits, combined with years of overspending, have left states with the accumulated debt burden. In some states the obligation totals tens of thousands of dollars for each taxpayer.
“Antiquated government budgeting rules and accounting standards are to blame,” says IFTA founder and CEO Sheila Weinberg. “States pay only what is due during the current budget year, which does not take into account true long-term obligations on their balance sheets. Hundreds of billions of dollars of retirement liabilities are not reported, which pushes these costs onto future taxpayers.”
Sunshine and Sinkholes
The current, second edition of the IFTA’s “State of the States” report reviews the individual financial condition of each state and identifies how each is managing its finances. The study concludes some states are managing their finances well and not creating additional financial burdens on their taxpayers, but many other states are doing the opposite. Those state are creating a swiftly growing debt burden that threatens their economic growth.
The report identifies “sunshine states” that have adequate assets available to pay their obligations. The top five (and their per-taxpayer surpluses) are: Alaska ($21,200), Wyoming ($20,200), North Dakota ($9,500), Utah ($2,600), and Nebraska ($2,400).
The study also identifies “sinkhole states,” those in the worst financial condition. The report examines their financial problems and identifies the amount each taxpayer in those states would have to send to their state treasury to cover the liabilities. The five “sinkhole states,” along with the obligation for each taxpayer are: Connecticut ($49,000), New Jersey ($35,800), Hawaii ($32,700), Illinois ($31,600), and Kentucky ($23,500).
“Politicians for years have been saying their budgets are balanced, but that’s because they’re not including these liabilities,” Weinberg says.”
These claims of balanced budgets have led citizens to believe their legislators are matching revenues to expenses. In fact, most state governments have been spending more than claimed.
She says she believes politicians have been doing this because citizens would have demanded they curtail spending if they had known the true size of retiree obligations and other spending programs.
Lax Accounting Standards
She points out some state governments have been ignoring money they owe to pretend their budgets are balanced. They do this by using cash accounting, which the IRS allows no business with more than $5 million in annual revenue to use.
“If they don’t write a check, they don’t include it in the budget,” Weinberg says. “So they’re just not paying the bills” even though bills keep coming due. Illinois, for instance, may owe up to $8 billion on overdue bills, according to Weinberg. Government leaders there have gone years pushing bills from one year into the next year, but that just makes the next year’s obligations even bigger.
State governments are able to do this because government sets its own accounting standards and lets itself get away with practices that are illegal for private businesses to use, Weinberg says.
The news for some states is especially grim. In four of the five “sinkhole states” per-taxpayer burdens have increased since the first report in 2010. In Hawaii, the increase was especially alarming. The study found that Hawaii saw its unfunded healthcare obligations increase by $3 billion in just one year.
Meanwhile, the “sunshine states” continue to improve, with four of the five increasing their per-taxpayer surpluses. Not surprisingly, the report found the “sunshine states” are becoming financially stronger while the “sinkhole states” are becoming more insolvent.
“State of the States 2012,” Institute for Truth In Accounting: http://truthinaccounting.org.